Retirement

What to know before you dip into your retirement savings

“Before making use of the Two-Pot Retirement System to access your retirement savings, it’s important to know the financial implications of your decision and the impact it will have on your retirement income after you stop working,” says Sherwin Govender, Business Development Manager at Glacier by Sanlam.

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Thinking about withdrawing?

Six things to remember before accessing your retirement savings:

1. Don’t rob your retired self.

In South Africa, only 6% of employed retirement fund members can afford to retire in comfort. Retirement savings are your money, but only belong to you when you retire. Spending it now could mean that you won’t have enough saved to live on when you retire. Remember that if you need to supplement your income after retirement, you are less likely to find income-generating employment than when you are younger.

2. Early access to retirement savings can be taxing, literally.

The proposed amount you can access will be taxed as income, in terms of current legislation. If you earn an income that is above the “tax-free” amount of R7 979 per month, you pay tax on the withdrawal amount at your marginal tax rate. For example, if you earn R20 000 per month, then you will pay 26% of the amount in taxes. It is important that you determine how much you will be paying away in unnecessary taxes before thinking of accessing your retirement savings.

3. Consider what you will lose in compound interest.

The main benefit of delaying access to your retirement fund is that you allow for a significant amount of time for your money to grow. Consider the example below. Mila made use of the early access on and Kyle did not. At retirement, Kyle had R794 312 more than Mila in retirement savings, which means Mila gave up compound growth on her money as a result of withdrawing R25 000 per year (which was around R18 500 after tax).

Table 1: What two investors will have accumulated in retirement savings by the time they are 60

	Kyle	Mila
Age in 2024	45	45
Employer pension fund value in 2024	R1 000 000	R1 000 000
Amount cashed out every tax year until age 60	0	R25 000
Assumed tax rate	26%	26%
Monthly contribution to pension fund	R2 500	R2 500
Growth rate	10%	10%
Age at retirement	60	60
Total retirement savings	R5 173 358	R4 379 046

Assumptions:

Retirement fund contributions stay the same over the period.
An annual growth rate of 10% was applied monthly.
The amount that was cashed out was calculated as a reduction in contributions.
Mila decides to withdraw a sum of R25 000 per tax year.
Source: Glacier by Sanlam

4. The official retirement age in most industries is 60.

Most companies have a policy that your employment will be terminated when you turn 60. If you don’t have enough saved for your retirement at that age, you may need to find income-generating employment elsewhere. If jobs are scarce now, what will the job market look like when you’re 60?

5. If you need the money to pay your debts, consider other options first.

Investigate debt counselling or consolidation before dipping into any of your savings or investments. A debt management programme will help you create a debt repayment plan that gets you back onto a healthy financial path.

6. You can phone a qualified friend.

It’s human nature to make financial decisions that seem good now but turn out to be regrettable in the future. Seek financial advice from an accredited financial adviser so that they can help you take the most appropriate action.

All sums and calculations presented in this article are for illustrative purposes only.
Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.
Sanlam Life Insurance Limited is a licensed life insurer, an authorised financial services provider and a registered credit provider (NCRCP43).